Elliott puts too many eggs in Honeywell’s basket
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jeffrey Goldfarb
NEW YORK, Nov 13 (Reuters Breakingviews) -Some ideas are rejected so often that it can be hard to revisit them with an open mind. Breaking up Honeywell International HON.O may be one such example. Elliott Investment Management is the latest proponent of cleaving the industrial conglomerate to wring additional value from its complex set of businesses, but the pushy hedge fund’s overconfidence risks yet another dismissal.
There is no mistaking Elliott’s conviction. Its $5 billion stake in Honeywell, disclosed in a letter to the board on Tuesday, is the biggest single investment in the money manager’s 47-year history, and one of the heftiest activist positions taken by any fund ever. If nothing else, that alone should get the attention of Chairman and Chief Executive Vimal Kapur, as well as other shareholders in the $150 billion company.
The proposal is not original, as Elliott concedes. Dan Loeb’s Third Point also pushed to split Honeywell’s hulking aerospace division in 2017, only to be placated by two smaller spinoffs. The board also has had plenty of time to consider the plan, especially as carve-ups at other creaking empires played out at General Electric, DuPont and beyond over the years. Instead, Kapur is trying to reverse industry-lagging shareholder returns by striking smaller deals to leverage broader trends in automation, aviation and the energy transition.
Making Honeywell two distinct companies — aircraft parts and systems in one and industrial products and services ranging from emissions monitoring to heat pumps in the other — has merit. Both are sizable enough to successfully stand alone. Right now, the combined enterprise fetches a valuation of about 14 times expected 2026 EBITDA, according to estimates gathered by Visible Alpha. A basket of peers in aerospace, building services, process automation and energy technology, including TransDigm TDG.N and Illinois Tool Works ITW.N, trade on average at about 16 times. The numbers imply a theoretical 15% uplift in market value, Breakingviews calculates.
Elliott sees more to gain. Partly by subtracting capital expenditures from EBITDA to more cleanly compare free cash flows, the firm reckons a simplified Honeywell with less distracted management teams would gain at least 50%, and maybe 75%, in value in two years. Moreover, Elliott contends that many investors underestimated returns from demergers at GE, United Technologies and Ingersoll Rand IR.N. Its cherry-picked examples, however, overlook disappointing attempts like those at DuPont or AT&T T.N, which created less value. The danger with such bravado, when the result could be distinctly pedestrian, is that it casts doubt on the underlying proposition.
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CONTEXT NEWS
Activist hedge fund manager Elliott Investment Management on Nov. 12 called for Honeywell International to split itself into two companies, arguing that there is scope for a 50% to 75% valuation uplift over the next two years by doing so.
In a letter to the company, Elliott said it had accumulated a $5 billion stake and wants the industrial conglomerate to separate its aerospace business from divisions selling products and services in commercial buildings, energy technology and process automation.
Honeywell said it looks forward to engaging with Elliott, adding that it had no prior knowledge of its investment.
Dan Loeb’s Third Point in April 2017 urged Honeywell to spin off its aerospace division. In October 2017, the company said it would spin off two other, smaller businesses.
Honeywell's conglomerate power has waned https://reut.rs/4hOYTiI
Editing by Jonathan Guilford and Pranav Kiran
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